By Lester McCarroll, Jr., Managing Director and Client Architect and Tom Kastner, President
GP Ventures offers Grooming services to its clients. One of the top questions we receive is, ‘What is Grooming?’
Grooming consists of pre-marketing strategic advisory services. We often meet company owners who wish to engage our firm, but the company is not ready to go to market. If the company requires some simple improvements that require a month or two to enact, then those improvements are usually included as a subset of our normal investment banking projects. This includes developing marketing materials (executive summary and confidential memo), assembling due diligence materials, and advising on cosmetic improvements (website, quick facility improvements).
If the company requires more in-depth assistance, that is when we recommend a longer term grooming project. Most often, financial performance and reporting are key issues, but we also take a look at all aspects of the business.
Grooming a company to go to market is a bit like getting ready for a date, or preparing a house for sale. Before a big date, a guy might get a haircut and wash his car. Before selling a house, you might mow the lawn, paint the house, and bake cookies to create a cozy feeling. However, in order to get the goal you are looking for, you might need to put a little more work into it, such as spending 6 months in the gym, or re-doing the kitchen. Grooming a company is similar to those long-term beautification projects.
Perhaps more important than ‘What is Grooming?’ is ‘Why Grooming?’ Usually, there are two reasons, to increase valuation, and to help insure a smooth process. Because companies typically sell for a multiple of EBITDA in the range of 5X+, every $1 improvement in EBITDA can lead to a $5 or more increase in overall valuation: not a bad ROI. We often find that an owner wants to obtain a valuation that is significantly above market level, and boosting performance is a good way to increase valuation. Not only do the owners get to enjoy a better bottom line, but they increase the value of the company too.
Helping to ensure a smooth process is also extremely important. Any surprises can derail or delay a process, and buyers can either get spooked and run, or re-adjust pricing and terms. For example, after finding a significant issue, a buyer may ask to put more of the purchase price in an earnout, or increase the amount of escrow. By eliminating surprises and properly preparing for due diligence, a company can obtain better terms, such as more cash at closing, and ensure a smoother and quicker process.
We have worked with a wide range of owners to help them improve their business. In one case, the owners of an electronics manufacturer had a valuation goal that was probably double what we all thought was fair value, and they most likely would not have received very good terms. The company was not growing, the owners were arguing with management, and many thought the company had no future. We worked with the owners and management to analyze the business and to discover their strengths and weaknesses. Through this process, we discovered that while the company was doing some things very well, they had a few key issues. Notably, we convinced them to focus on higher margin products (and incentivize their sales force properly), expand geographically, re-vamp their website, and other items.
As it turned out, sales and profits jumped, and the owners have decided to hold on to the company for a few more years. Owners and management are doing well, and the company is investing in new equipment. At this point, the value of the company has most likely tripled.
In another case, a cybersecurity firm had steady but small revenues, with over about 80% coming from one large municipality. The owner had goals of revenue growth, along with broadening the client base and reducing customer concentration. The GPV client architect worked to build the firm’s strategy and business development capability; establishing formal sales management processes, expanding the sales pipeline into multiple vertical industries with elevating IT spend, and brokering relationships that have led to lucrative contracts. These results enable a less risky growth path with significant revenue streams, and a diverse set of revenue sources. When they decide to go to market, the lower customer concentration will have increased the company’s valuation and significantly improved the likely terms at closing.
We have a long list of ‘war stories’ of deals that we re-traded, delayed, or died due to surprises that came up during due diligence. One recent public example is the Verizon-Yahoo deal, in which it was found that 500 million Yahoo accounts were hacked. That discovery has certainly delayed the closing of the deal, and the press has speculated that value may have been cut by $1 billion.
GP Ventures is different from other consultants and performance advisors because we take the perspective of what buyers are looking for. We have worked on many deals, both sell-side and buy-side, so we are in touch with what buyers are thinking. We find that many owners are experts on selling their products or services, but selling a company is quite different. Most owners only get one shot to sell a company, so it is important to be well-prepared.
GP Ventures is an M&A advisory services firm focused on the tech and electronics industries. Our services include sell-side, buy-side, and pre-marketing strategic advisory services. For more information, contact Lester McCarroll, Jr. at 847-476-6018 or at email@example.com
Securities conducted through StillPoint Capital, Member FINRA/SIPC, Tampa, FL
About the author:
Lester McCarroll, Jr.
Managing Director and Client Architect
Lester has 30+ years’ experience in the technology sector. Technology roles for over 20 years at AT&T Bell Labs and Motorola. Principal Consultant at The McCarroll Group, where he has worked with over 100 clients, as well as with the University of Chicago, IIT, Chicago State University, and the nextONE Business Accelerator Program, a joint venture between the Chicago Urban League and the Kellogg School of Management at Northwestern University.
M.S. Electrical Engineering Stanford University, B.S. Electrical Engineering Illinois Institute of Technology